“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

Mortgage-Interest Deduction: The Unseen Costs

In general, I am opposed to just about any tax increase. However, the mortgage interest deduction is one of my least favorite tax breaks. First of all, it’s a regressive tax deduction that transfers wealth from renters and businesses to homeowners. Second, it causes home prices to rise relative to the value of similar rentals, causing conversions of rental properties to condos and other imbalances. Thus, many markets have had a net loss of rental housing stock.

As a result of this imbalance of demand related to ownership incentives, developers have less incentive to build for long-term holding since it is more profitable selling condos instead of rentals. Because condo developers will not be responsible for maintenance over the life-cycle of the property, they tend to care less about durability and energy-efficiency than construction cost. In the long run, the homeowner pays the added costs of the higher-maintenance, less-efficient home.

Repealing the deduction will be an uphill battle. Homeowners are a reliable voting block, so pandering to them usually pays off for politicians. Repealing the deduction would probably drive home values down further, so it will probably have to be tabled until the credit markets recover.

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About Adam Hengels

Adam is passionate about urbanism, and founded this site in 2007, after realizing that classical liberals and urbanists actually share many objectives, despite being at odds in many spheres of the intellectual discussion. His mission is to improve the urban experience, and overcome obstacles that prevent aspiring city dwellers from living where they want. http://www.marketurbanism.com/adam-hengels/

Bill Nelson

There are a few things about the mortgage-interest deduction that should also be considered:

1. If a house sells for $100 with a $10 deduction, then the actual price would be somewhere between $90 and $100, depending on elasticities. That is, it is not necessarily much of a subsidy.

2. If in the above example, the actual price does fall to $90, then that would affect ownership of rental buildings, too. For example, rental properties might cost $900 instead of $1000. And competition among landlords would lead to rental units being less expensive. So, renters benefit, too.

3. Would it be fair to abolish the deduction for existing home owners? Remember, any abolishment would destroy much of their invested capital, as their homes would decline in value without the deduction. So, why should they face a huge unanticipated tax increase as well?

4. The conversion of rental properties started long after the mortgage-interest deduction was implemented. Also, note that the NYC rental market is fairly healthy among houses with fewer than four units. To me, that suggests that the conversions are a consequence of burdensome regulations imposed on larger buildings — and not mortgage-interest deductions.

5. Repealing the deduction would probably result in more taxes and government spending. That in itself should be enough to leave the deduction alone.

Bill Nelson

There are a few things about the mortgage-interest deduction that should also be considered:

1. If a house sells for $100 with a $10 deduction, then the actual price would be somewhere between $90 and $100, depending on elasticities. That is, it is not necessarily much of a subsidy.

2. If in the above example, the actual price does fall to $90, then that would affect ownership of rental buildings, too. For example, rental properties might cost $900 instead of $1000. And competition among landlords would lead to rental units being less expensive. So, renters benefit, too.

3. Would it be fair to abolish the deduction for existing home owners? Remember, any abolishment would destroy much of their invested capital, as their homes would decline in value without the deduction. So, why should they face a huge unanticipated tax increase as well?

4. The conversion of rental properties started long after the mortgage-interest deduction was implemented. Also, note that the NYC rental market is fairly healthy among houses with fewer than four units. To me, that suggests that the conversions are a consequence of burdensome regulations imposed on larger buildings — and not mortgage-interest deductions.

5. Repealing the deduction would probably result in more taxes and government spending. That in itself should be enough to leave the deduction alone.

I agree that abolishing the deduction for current owners would unfairly destroy invested capital and incentivise government spending.

I also agree about the NYC rental market, but NYC is probably the only US city that doesn’t have an overwhelming premium price for condos vs. rental.

The deductions played a small roll in the conversion phenomenon, but I agree that regulation, along with sub-prime lending played a bigger role. In particular, zoning limitations on number of units favors owners vs renter.

APH

Great comment, Bill.

I agree that abolishing the deduction for current owners would unfairly destroy invested capital and incentivise government spending.

I also agree about the NYC rental market, but NYC is probably the only US city that doesn’t have an overwhelming premium price for condos vs. rental.

The deductions played a small roll in the conversion phenomenon, but I agree that regulation, along with sub-prime lending played a bigger role. In particular, zoning limitations on number of units favors owners vs renter.

Bill Nelson

Here’s another point about mortgage-interest deductions:

6. Let’s say you buy a house, and simultaneously save $10,000/yr because of the mortgage interest deduction, and also spend $10,000/yr in real estate taxes. The net effect is zero. Eliminating the deduction by itself is therefore like imposing a $10,000/yr tax on you. What did you do to deserve that treatment?

This sort of reminds me of churches being tax exempt. Some people say that this isn’t fair, and I agree: ALL businesses should be tax-exempt. So, I agree that the present real-estate tax situation isn’t fair: All real-estate deductions AND TAXES should be abolished.

Bill Nelson

Here’s another point about mortgage-interest deductions:

6. Let’s say you buy a house, and simultaneously save $10,000/yr because of the mortgage interest deduction, and also spend $10,000/yr in real estate taxes. The net effect is zero. Eliminating the deduction by itself is therefore like imposing a $10,000/yr tax on you. What did you do to deserve that treatment?

This sort of reminds me of churches being tax exempt. Some people say that this isn’t fair, and I agree: ALL businesses should be tax-exempt. So, I agree that the present real-estate tax situation isn’t fair: All real-estate deductions AND TAXES should be abolished.

Great points. Abolishing the taxes would be nice as long as it doesn’t burden others disproportionately.

Part of the value of the deduction ends up baked into the value of the property, which is a small part of why there is a premium value of owned property vs rented. So, in the long run, the net effect of the deduction is smaller. The short term effect of eliminating the deduction would hurt, but in the long-run housing prices would lower slightly.

Proportionately, the value of the deduction is significantly less than real estate taxes in most places.

APH

Great points. Abolishing the taxes would be nice as long as it doesn’t burden others disproportionately.

Part of the value of the deduction ends up baked into the value of the property, which is a small part of why there is a premium value of owned property vs rented. So, in the long run, the net effect of the deduction is smaller. The short term effect of eliminating the deduction would hurt, but in the long-run housing prices would lower slightly.

Proportionately, the value of the deduction is significantly less than real estate taxes in most places.

Hidden fees are the worst and most annoying thing ever. They seem to be everywhere though I don’t understand how they hide them anyways. I think ever company should just lay it out for you flat out especially when it comes to mortgages.

JabbaJaw

It seems that people have problems and questions about mortgages here. I can recommend a mortgage calculator that I use myself. Hope you find it useful.

Good apartments/condos to rent in Capitol Hill, Seattle?
I am seeking advice from those of you who currently live in Seattle, Capitol Hill in particular, about where I can find a good-quality apartment. I am looking for a location that is walkable to Broadway, and that is safe, clean and quiet. I am hoping that I don’t have to spend more than $1200 on renting an 1-bedroom or studio, but the price is a minor consideration.

Could you share your positive/negative experiences with your current housing?